Available Online: http://www.ejpau.media.pl/volume18/issue2/art-07.html
FROM „DEFICIENCY PAYMENTS” THROUGH „DECOUPLING” TO “GREENING” – DIRECT PAYMENTS IN THE EUROPEAN UNION
Julian T. Krzyżanowski
Department of Agricultural and International Economics, Warsaw University of Life Sciences, Poland
The evolution of the direct payments system in the EU,
as a basic support to agriculture, is presented; beginning with the first forms
of payments introduced by the British before United Kingdom joined the European
Community. The standard system brought in by the McSharry Reform is discussed,
which was altered by the Fischler Reform, that introduced i.a. the so called “decoupling”.
The SAPS System, adopted as an alternative by the new member countries is analysed
briefly. The paper is finalized by presentation of the principles of the direct
payments system for 2014–2020. One of the new elements in this system is
that farmers are obliged, to a much greater extent than before, to comply with
pro-ecological requirements, so – called “greening”.
The evolution of the direct payments system in the EU, as a basic support to agriculture, is presented; beginning with the first forms of payments introduced by the British before United Kingdom joined the European Community. The standard system brought in by the McSharry Reform is discussed, which was altered by the Fischler Reform, that introduced i.a. the so called “decoupling”. The SAPS System, adopted as an alternative by the new member countries is analysed briefly. The paper is finalized by presentation of the principles of the direct payments system for 2014–2020. One of the new elements in this system is that farmers are obliged, to a much greater extent than before, to comply with pro-ecological requirements, so – called “greening”.
Key words: direct payments, common agricultural policy, “deficiency payments”, “decoupling”, “greening”.
The Treaty of Rome lists the following major goals of the common agricultural policy:
- improving the productivity of agriculture by promoting technical progress and ensuring rational development of agricultural production and optimal use of production factors, in particular work;
- ensuring the appropriate standard of living for the agricultural community, in particular by an increase in individual income of persons involved in agriculture [1, 5].
Hence, the increase of agricultural incomes is a goal on its own, as well as a means to pursue the goals of efficiency. In order to achieve that, the direct financial aid could be used for farms with low income or the agricultural prices could be increased. The impact through higher prices in cases of a large number of farms and the diversity of economic conditions was recognized cheaper and easier in practice than the direct financial aid (deficiency payments). However, the idea of such payments was created in Great Britain in early 1950s [3, 13]. This system operated from 1952 to 1970. The main difference between this solution and the system of supporting the prices was a different source of financing of the payments. The support for agricultural prices took place at the expense of consumers who paid higher retail prices, while in the British system it was the taxpayer who paid for the increase of the farmers' incomes. The deficiency payments can thus be considered the beginning of direct payments.
The aim of this study was to present the evolution of the main instrument for improving agricultural incomes in the European Union, i.e. direct payments. This important form of farm subsidy was one of the key elements of accession negotiations with the new member countries (concluded in 2002), and later became kind of a flywheel for their agriculture.
MATERIALS AND METHODS
This paper is based on articles of other scientists, author’s previous research, EU documents and legislation. It is also partly based on author’s own experience while working for the Polish Ministry of Agriculture, in the years of negotiations and after.
The method could be described as analysis of EU documents and acts of law, as well as literature. The idea of the paper was to present the existing instruments. However the analysis could be deepened (but not on dozen or so pages), by presenting different scientific views, and discussion on the idea of the necessity of direct payments, its merits and flaws, evolution of ideas etc.
RESULTS AND DISCUSSION
The use of high agricultural prices in the collection agencies was the policy most often used in the majority of EEC countries. Supporting the incomes by means of agricultural price increases was beneficial as long as the EEC countries were dependent on the import of agricultural products. At the end of the 80s, the policy reached its end. The guaranteed prices encouraged manufacturers to manufacture more and more without any concern about the sales, using the achievements of technical progress. Large amounts of food were produced and huge costs of storage and surplus disposal of agricultural products originated. Under the pressure of these surpluses, both the agricultural prices and farmers' income began to decrease. The EEC then began a restrictive policy of agricultural prices, whose purpose was, first of all, to restore the market balance. The guaranteed prices were frozen, and in many cases their use was suspended. The direct subsidizing of particular groups of agricultural manufacturers and other measures to suppress a further decrease in the farmers' incomes were introduced.
Basic changes in the system of payments were introduced through the McSharry's reform of 1992.
The McSharry Reform
Using the example of the cereals market, the principles of McSharry's reform of 1992 will be briefly presented [6, 8]. In general, the agricultural prices were to be formed on the market and supposed to gradually reduce to the world prices. The farms were to receive a compensation for any lost revenues.
The proposed amount of the target price had to correspond to the level of cereals prices on the world market, assuming its stabilization. In 1992, the average market price of cereals in the EC countries was 155 ECU (ECU – European Currency Unit was really used for accounting, in 1992, 1 ECU equalled 1,29 USD). Farmers were to receive a compensation of the loss of revenues in the amount of 55 ECU for 1 t. It was the difference between the current market price of cereals – 155 ECU for 1 t and the target price 100 ECU for 1 t. The amount of the payment could change along with the changes of yields, as well as the general situation on the EU and foreign markets. The rates of subsidies converted into an area unit were agreed regionally depending on the average yields achieved over the past few years. For example, average yields for the whole Community calculated in the manner mentioned above amounted to 4.6 t per 1 ha. Hence, the size of payments was 253 ECU/ha (4.6 t/ha · 55 ECU/t). In the first year of the reform, the payment was 30 ECU/t, namely 138 ECU per 1 ha; in the second year, it was 45 ECU/t, i.e. 207 ECU per 1 ha, and only in the third year, the target size was supposed to be achieved. The change in the amount of payments resulted from subsequent reductions of the target price: in the first year to 125 ECU/t, and in the second year – to 110 ECU/t.
The amount of payments was gradually increased in the subsequent years and then it was changed with the reform package of 1997. (the so-called Agenda 2000) . At the beginning of the present century, the direct payments for the most important products were such as in Table 1.
Table 1. Direct payments applied in the European Union in the standard system
Protein crops [EUR/t]
Flax and fibrous hemp [EUR/t]
Grass silage [EUR/t]
Special beef premium [EUR/pcs.]:
Suckler cows [EUR/pcs.]
Premium for slaughtering [EUR/pcs.]:
– bulls. bullocks. cows and heifers
The extensification premium [EUR/pcs.]
Potato starch [EUR/t]
Dried fodder [EUR/t]
– Dark air cured
– Fired cured
Source: Based on 
Fischler's Reform (2003)
The CAP reform, agreed by the ministers of agriculture of the European Union member states in June 2003, introduced a method of setting the EU support directed to farmers, which was entirely different from the previous one. Although it is based on the previous system, the single area payments are a new solution, as they are not related, as it used to be previously, to the support to different production lines.
As it has been mentioned above, the importance of payments increased in line with the implementation of Mc Sharry's reform of 1992–1993. In the next years, the direct payments constituted three fourths of the payments for agriculture coming from the EU budget.
Starting from 1993, the main support for the EU farmers are the payments to field crops, special premiums for cattle and suckler cows, etc. The payments were still binding until the end of 2004, and to a limited extent, they were implemented in some member states even after the introduction of the single area payments since 1 January 2005, in connection with the possibility of using also the partial decoupling of payments.
The direct payments were recognized by the European Commission as an instrument more unambiguous than the market support and intervention mechanisms. The payments supplemented other instruments of support, which were replaced by them in the subsequent years. They were also perceived as a convenient temporary mechanism to disaccustom the farmers from instruments disturbing the market operation and, simultaneously, to provide better use of generally available goods (public goods) than previously along with the support for agricultural income. For example, the criteria of the stocking density related to the support for beef livestock producers were such an instrument. It was a counterbalance to the intensive use of pastures.
On the other hand, in recent years, the deficiencies of the applied system became more and more visible. The European Commission adopted the opinion, expressed for years by many agricultural economists, that the sectorial payments still distort the market operation, though to a smaller extent than the market intervention, as they require from a farmer a specific line of production, in order to be supported. This meant that in many cases, the farmers were stimulated to maximize the production, even if they received information from the market that the production should be limited or stopped.
Another significant argument for the use of the direct payments is the fact that they are excluded from the "liabilities on reduction" under the Uruguay Round of WTO. They have been qualified to the category of the "Blue Box". Such a solution has arisen as a result of a compromise between the EU and USA in the early 1990s.
Along with the commencement of new WTO negotiations in 2000, it turned out that the settlement was questioned by most of the WTO members who demanded changes in the agreement. If the "Blue Box" ceases to exist, the only way to secure the direct payments for the farmers from the EU countries for the future is the modification of payments, so that they would be qualified as funds of the "Green Box" group, i.e. the decoupled payments, which are not subject to reduction on the basis of the general agreement <footnote 1>.
Because of the above reasons, the CAP reform plans (January 2003) include the decoupled direct payments as the main element of the proposed changes. As a result of the arrangements, on 26 June 2003, it was determined that, in accordance with the EU regulation 1782/2003, on 29 October 2003, a new category of payments would be created, the single area payments, or Single Payment Scheme (SPS).
The new system was introduced on 1 January 2005. The financial means are paid to all farmers qualified to this solution regardless of a product they produce. They can also produce nothing. Obtaining assistance, however, is dependent on the fulfilment of specific agronomic requirements and the one related to environmental protection, called "cross-compliance" . The member countries could decide to introduce the SPS within two years. However, the system had to begin its operation at the latest on 1.01.2007.
The amount of payments is in most cases based on the actual size of pay outs for each farmer received in the reference period 2000–2002. For each member country (including the newly acceding ones), the maximum annual amounts of the support have been determined, starting from 2005.
The rates of pay outs for farmers under the SPS are determined by dividing the size of payments from three years by the area entitled to the payment within the three years. The entitled area includes also the forage area.
So, assuming that a farmer who produces only cereals, cultivated 100 ha of wheat, reaching a yield of 6 tons from one hectare, then his payment was: 100 ha × 6 tons × 63 EUR for 1 ton, that is 37 800 EUR, currently he will receive such an amount for the farm, or if you divide it once more by the area, 378 EUR per each hectare.
The SPS shall be paid only if the entitlements for payments correspond to the determined area of arable land. The principle is that the entitlements to payments are related to the farm's area and cannot be the object of trade on financial markets.
Slightly different solutions are applied to integrate the dairy sector with SPS. The support is applied since 2004 and shall be paid to every manufacturer of milk for a ton of assigned amount. This amount was increased on an annual basis in years 2004–2006, in proportion to the reduction in the market support for the dairy sector. Theoretically, payments for milk were separated from the SPS until 2007. In the following years the amount of payments was included in the amount resulting from the JPO. However, on the basis of derogation, the member countries could decide to include the "milk" payments in the SPS, even since January 2005.
The entitlements to payments can be transferred on other entities by way of sale or other "specific transfer", along with the ground, or without it. This means that the entitlements do not always have to be associated with the same agricultural plot in order to cause the payment. In order to obtain the payment there must be an area of arable land entitled to it, which does not have to be physically the same area. In the case when the entitlements are leased, the shift of entitlements must be accompanied by passing the ground to the new lessee.
Also, the national reserve has been created to grant the right to payments to those, who did not manage to obtain entitlements in the reference period, first of all because of death or inability to work, as well as natural disasters, a war or an epidemic. The reserve may constitute up to 3% of the total amount of entitlements granted to each member state. If the country has not opened such means, it must create it by reducing the existing support for its farmers.
The member countries can also create the reserve for the newly entitled parties by imposing fee for selling the payment entitlements. Also the entitlements that will not be used for three years automatically come back to the reserve.
The payments under the SPS are made once a year in the period from 1 December to 30 June of the next year. Some funds may be paid in advance, before 1 December, if in a given year the farmers experience serious financial difficulties.
As an alternative for full decoupling, particular member countries can leave a part of the payments system associated with the production that is based on the cultivation surface or the number of farm animals. Such a system was called a partial decoupling. The justification for the choice of such an option is the concern that some production directions can completely disappear, in particular in less important sectors, if the farmers do not have an additional motivation for keeping of a given line of plant production or breeding of a given species of animals.
The main options which can be considered are:
- In field cultivations:
To maintain the undistributed (according to the old system) payments for field crops up to 25%
Or to maintain the undistributed payments of durum wheat up to 40%
Maintain the undistributed bonuses up to 50%
- Beef sector:
To maintain the present premiums for suckler cows up to 100% and maintain the current slaughter premium up to 40% or maintain the current slaughter premium up to 100% or alternatively maintain a special premium for bulls up to 75%
The member countries may also opt for the maintenance of the slaughter premium for calves. In this case, the limit of 185 kg of carcass weight shall be applied.
The member countries may choose various combinations of these options, or do not choose them at all.
In order to counteract the cases of "intolerable distortion of competition" resulting from the application of decoupling, and to "respect international obligations", the Commission may take appropriate measures under the procedure of the Management Committees.
It should be noted that some kinds of direct payments will be further inseparable and they will not be incorporated into the SPS, unless a given member country requests their disconnection. These are:
- the aid for drying of crops (additional support for cereals, oilseeds, flax and hemp, paid in the subarctic regions)
- the direct payments for the farthest regions (e.g. the Madeira, Azores, Canary and Aegean Isles)
- all subsidies for seeds
An alternative to the idea of payments for farms based on the historical value of entitlements to the old funds of the CAP is the single (lump sum) regional payment. In this case, the total value of entitlements in a given region will be divided by the total number of hectares entitled to payments and all farmers will receive the same lump payment per hectare. By choosing this option, particular countries may determine separate rates of the support for permanent grasslands and arable lands. The regional payment will also include the set-aside hectares.
A region happens to be defined in various ways in the member countries. For example, in Great Britain, the regions are England, Wales, Scotland and North Ireland, whereas in Germany, the 16 federal states are considered to be regions.
The member countries having less than 3 million hectares entitled to decoupled direct payments can be defined as a region.
The producers receiving the SPS can allocate their lands for any type of production with the exception of the production of potatoes (besides the starch ones), fruit and vegetables or other perennial crops. There is, however, an exception. The payments can be entitled for an area on which fruit and vegetables are cultivated, but this applies only to traditional producers who cultivate on the area registered in the period 2000–2002.
The existing payments resulting from the set-aside scheme will constitute the basis for applying for payments under the SPS system. This means that each farmer who applies for payments on arable grounds must exclude from production at least 10% of their acreage every year. The payments resulting from the set-aside scheme may be used rotationally or not rotationally. The European Commission reserves the right to regulate the payments resulting from the set-aside scheme "in case of market needs".
The need for the set-aside scheme does not apply to ecological agriculture. The producers can also cultivate plants not constituting the raw material for the production of food on the set-aside lands, provided that they concluded a contract with a processor.
The member countries can also use additional payments on the country or regional level "in order to support some production lines that are important for environmental protection or the improvement in quality and organization of the sale of agricultural products". These payments, often referred to as "national envelopes", may be created by subtracting a part constituting up to 10% of total national payments. This allows each country for the independent creation of support programs up to the amount of 10% of the total agricultural budget. The rates of payments in this system cannot exceed the amount of specific forms of assistance as stipulated for the sectors of cattle, sheep and arable crops.
Granting of full SPS and other direct payments is associated with the need of compliance with some basic statutory standards concerning the environment, food safety, plant and animal health and animal welfare. Additionally, the member countries have to ensure that the whole agricultural land is maintained "in a good agricultural and environmental condition" - particularly the land that is no longer used for production purposes. The minimum requirements in this respect must be identified by the member countries taking account of "the specific character of particular areas, including the soil and climatic conditions, the system of managing and using of the land, the crop rotation, applied agrotechnics and the structure of farms".
In the case of failure to respect the requirements related to the environmental protection (cross-compliance), the direct payments will be reduced or withheld. In the case of failure to comply with regulations, the share of suspended pay outs in total can be maximum 5% or 15% at the repeating non-compliance with the law. The penalty for conscious non-compliance should constitute at least 20% of payments, and it may consist in full exclusion of the farm from receiving of payments for a year or even several years.
It has been determined that 25% of total receipts from penalties for non-compliance with environmental requirements may be retained by the member states - the rest returns to the CAP budget.
During the summit in Brussels in 2002, a clause which states that the use of the SPS shall not cause the exceeding of the CAP budget fixed for particular years was determined. That mechanism has been operating since the beginning of the budget year 2007.
From 2005 until 2012, a part of the SPS and all other combined direct payments was deducted from the amount of payouts for farmers and directed to a new fund that financed the development of rural areas. This amount of 1.2 billion EUR was at the disposal of the member states, regardless of the funds available pursuant to the Regulation of 1257/1999.
The process of moving the funds from the "Pillar I" of the CAP (the direct payments and market support) to "Pillar II" (rural development, agricultural and environmental funds) is defined as the "modulation".
The annual rate of reducing of the funds for the "Pillar I" is presented below:
The first 5000 EUR transferred on the annual basis in the form of direct payments is excluded from the modulation. In practice, this means that most of the farmers in the EU countries will be completely excluded from the modulation. The amount corresponding to a single percentage point of the funds for modulations remains in the member state. Other funds are distributed among the member countries according to a complicated algorithm. The calculation takes account of the area of arable land, employment in agriculture, size of the GDP per 1 inhabitant (according to the purchasing power parity) in each member country.
However, the division is subject to adjustments to ensure to all member countries the refund of at least 80% funds which were gathered as a result of the modulation. In the case of Germany, at least 90% of funds will be retained at the disposal of the country. The goal here is to leave in the country the funds which would compensate the impediments arising in Germany in connection with the cessation of the intervention on the market of rye as a result of the CAP reform of 2003. All the funds intended for the modulations must be supplemented by national funds. At least 40% of all public funds in the financing of Pillar II projects must come from national funds, the funds shifted from Pillar I may constitute the maximum of 60%.
In order to help the farms in the adaptation to the new legal regulations, the member countries have created an appropriate farm advisory system. The task of the advisory services is to ensure "the minimum of the statutory standards, the requirements related to the compliance with good agricultural practice and the requirements related to the environmental protection" specified in separate regulations concerning the cross-compliance.
The creation of the advisory service is mandatory since 2007. However, the farmers do not have to use the assistance of the advisory services. The priority of using the assistance of these services is given to farmers who receive more than 15 000 EUR annually in the form of direct payments.
Direct payments in the new member states, the simplified system (SAPS)
The single area payment is paid in 10 new member countries as in the EU-15, i.e. since 1.01.2005. Nonetheless, the payments for the new EU member states are subject to separate regulations, both in terms of the amount and the method of payments.
As an alternative for the SPS, the new countries could choose the simplified system of payments (SAPS) and follow it initially until the end of 2008 (finally, the use of this system has been extended until the end of the current financial perspective, i.e. until 2020). This system has been chosen by all the acceding countries except for Malta and Slovenia.
Under the simplified system, farmers will receive the payments not according to the individual production of the farm, but on the basis of agriculturally used area and the rates per 1 ha of the area determined for a given country. This solution is very close to the principles of regional payments. The main difference between the systems consists in the fact that in the SAPS, all farmers can use the hectare-based payments, including those who cultivate plants not covered by the previous payments under the CAP (e.g. fruit and vegetables, potatoes, etc.). When the new member countries choose to stop using the SAPS, they must accept the "regionalized version" of the SPS. For the countries of "the old 15", the regionalized version is only one of the possible solutions. In the opinion of the Commission, the new member countries cannot accept the standard model of the SAPS because the countries did not benefited from the support under the CAP budget in the reference period 2000–2002, being the basis for the payments in the EU-15. Therefore, the payments cannot be established based on the historic data.
It means that the national envelope determined for each member country (according to what was negotiated in the accession treaty) will be divided into regional envelopes. These quantities will be then divided by the size of the area entitled to the payment in each region and farmers will receive the payments according to the number of entitled hectares in their farms.
Nonetheless, the new members will be able to use partial decoupling under the "regionalized" SAPS on these terms as it is used by the EU-15 in their regional option.
The new member countries received also some reliefs with regard to the obligation to apply the cross-compliance – the necessity to provide some standards in order to receive the payments. The cross-compliance has been applied to the new EU member states since 2005 with two exceptions from general principles:
- the transitional periods negotiated by some countries will be respected
- the countries using the SAPS shall be subject to maintain the principles of good agricultural practice, and not to observe the cross-compliance statutory standards, just as it has been determined for the countries using the SAPS.
Neither the modulation (using a part of direct payments for the purposes of rural development), nor the planned mechanism of the "financial discipline", was not tol be used in the new member countries until the moment of the receipt of the direct payments in their full amount by these countries.
It is important to be aware that the introduction of the SPS system surprised the new EU member states. The new countries negotiated the direct payments in the old system (the standard one – the payments for particular products) and the size of funds for particular countries, the envelope, was calculated according to that system. The negotiations were completed in December 2002, the Treaty of Accession was signed in June 2003, and in July that year, the reform of the payment system, later called the Fischler's reform, was announced. The only concession by the European Union was the possibility of using the simplified system, the SAPS.
Throughout the whole period of negotiations concerning the expansion, the Commission maintained that farmers from the new member states should not be granted the full EU rates of the direct aid. An argument was that in the light of the large discrepancy between the GDP levels in the east and the west, a rapid inflow of high payments would have interfere in the economy of the rural areas in the Central and Eastern Europe and cause a growth in inflation. Another issue, which the Commission was concerned about, was the fact that the payment of full rates of the direct aid in 10 new member states would have been a large burden for the EU budget.
Finally, a compromise agreement was achieved about the 10-year temporary period, during which the rates in the new member states would be increased gradually until reaching the full amount binding in the EU-15, starting from 25% of the full rate in the first year (i.e. 2004). It was also agreed that the new member countries would have the possibility to grant supplementary payments to their farmers in the amount of 30% of the full EU rate. This means that farmers could actually receive up to 55% of the full rate of the EU payment in the first year (Tab. 2). The national supplementary payments were reduced to 20% in 2011 and to 10% in 2012, when the EU contribution reached 80 and 90% accordingly.
Table 2. The schedule of direct aid in new member countries (as % of full EU rate)
Source: Based on 
An alternative to the abovementioned solution for the member states is to grant supplementary payments in order to maintain total rates of aid at the level of the already existing payments. They can be additionally increased by 10%, provided that the payments will not exceed the basic level EU-15. (In Slovenia, the national payments could be supplemented in 2005 by 15% as compared to the level of 2003, in 2006 by 20%, and since 2007 – by 25%.) The Czech Republic has been entitled to supplement the payments for starch potatoes up to 100% of the EU level starting from the first day of the EU membership)
Initially, the new member countries got two options with regard to spending of the direct payments. They can grant the aid based on individual applications concerning various direct assistance schemes under the CAP (standard system – see the information included in Chapters related to particular markets), or use the simplified system.
The basic principle of the "simplified" system was that the total amount of aid under the CAP, to which a given member country is authorized, is cumulated and then divided by the total number of hectares of arable lands in this country. It enables to obtain a relatively easily formulated amount of aid, which is paid to all farmers, according to the areas. An advantage of this system is, among others, that when it is used, the procedures related to handling of the Integrated Management and Control System, both for farmers and for administration, can be significantly reduced and simplified (as compared to the standard system).
However, the negotiations between the EU and Poland which, as one of the first countries, wanted to provide the simplified system, revealed some complications concerning in particular the national supplementary payments. The basic simplified payments were to be granted to all farmers, regardless of the type of production, but the EU wanted to prevent granting the supplementary payments in the sectors not covered by the direct payments under the CAP (e.g. potatoes, sugar beets and vegetables).
The supplementary payments are thus paid only to planters of products covered by the EU aid, and the whole amount to which a country is authorized is divided by the number of "eligible" hectares. The supplementary payments for farm animals are paid in a similar way, and the basis for them is the "forage area
The supplementary funds may come from national funds or from the transfer of a part of funds assigned to a given country by the EU for the development of rural areas to the budget of direct payments.
Nevertheless, the assignment of these funds is governed by quite complex principles. In the period 2004-2006, none of the member countries could use more than 20% of funds assigned for the development of rural areas for that purpose (or 25% in 2004, 20% in 2005 and 15% in 2006). In addition, the national co-financing is necessary as in the case of all other payments for the development of rural areas, which means that the governments of particular countries must make a 20% contribution of funds to the transferred payment.
Furthermore, the money transferred from the funds allocated for the development of rural areas cannot constitute more than 15% of the full EU rate in 2004, 10% in 2005 and 5% in 2006. Since 2007, the supplementary payments can be financed only from the national budgets.
The provisions of the "Health Check"
Among the provisions of the reform of 2003 concerning the modification of the existing instruments of regional programs, there was also a decision to conduct the evaluation of the CAP functioning (the Health Check) in 2008. A particularly important issue for the lasting discussion about the future operation also the liability of the European Commission and Council to analyse the problem of high differentiation of the direct payments in the EU and the presentation of the proposal of appropriate changes.
During the meeting of the EU Agriculture and Fisheries Council of Ministers on 18-20 November 2008, the acceptance of the final agreement that ended the discussions under the Health Check took place . The Review resulted in the adoption of four legal acts which modified the basis for the functioning of the common agricultural policy, including the Council's Regulation that established common principles for the systems of direct support for farmers under the Common Agricultural Policy and specific support systems for farmers.
When it comes to the condition of the cross-compliance connected with the payments, two additional criteria have been added to the principles of the Good Agricultural and Environmental Conditions – GAEC (buffer zones along watercourses and principles of using the water for irrigation). Also, some of the standards under the Good Agricultural and Environmental Conditions (GAEC) were made optional, thereby ensuring the possibility of a better adaptation of those standards to specific natural conditions of the member states.
The Council decided also to implement new tasks under the system of payments. The scope of activities that may be performed under Article 69 of the Regulation 1782/2004 (concerning the direct payments) (now Article 68) under 10% of the direct payments was extended. Previously, the article allowed for the activities involving the protection or improvement of the natural environment, and the improvement of the quality and marketing of agricultural products. However, these funds may also be spend for the support of the producers of milk, beef, mutton and goat meat in the regions with difficult farming conditions or at farms particularly exposed to the negative effects of the ongoing changes. The support can have, e.g., a form of additional payments for animals or the area of pastures, but only in the scope which enables the maintenance of the current level of production.
Additionally, with regard to the direct payments:
- A manner of the convergence of direct payments between the member states (under the decisions concerning the Multiannual Financial Framework – MFF) has been determined. In the member states with the direct payments per hectare below 90% of the EU average, the difference between the present amount of payments and the 90% of the EU average is to be reduced by one third. This process will be conducted gradually, starting from the fiscal year 2015 until the budget year 2020. As a target, all the member countries shall reach the level of payments of at least 196 EUR/ha (in current prices). The abovementioned convergence will be funded by countries where the direct payments are higher than the EU average.
- The draft regulation provides a possibility of the continuation of the simplified direct payment system SAPS until 2020. At the same time, new components of the payment system shall be used, such as: the payment for agricultural activities beneficial for the climate and environment, that is the "greening", the payments for small farms, payments for young farmers, payments connected to the production and payments for the areas with natural limitations. The final solutions concerning the continuation of the SAPS have been extended with a possibility to use the redistributive payment (the payment for the first hectares) also in the countries choosing the SAPS.
- The member states were provided with a possibility to shift the funds between the pillars (on the basis of the arrangements of the Summit concerning the MFF), i.e. the possibility of shifting up to 15% of the national envelope of funds from Pillar I to Pillar II or from Pillar II to Pillar I, and for the countries with the rate of payments lower than 90% of the EU average – the possibility of the relocation of up to 25% of the national envelope from Pillar II to Pillar I.
- The countries using the SAPS will have the possibility of the continuation of the support from the national budget for sectors now supported under the supplementary payments, up to 2020. The basis for establishing of the amount of this national support will be the amount of supplementary payments (national support) approved by the EC for 2013. This aid would be gradually decreased by 5 percentage points, from 75% in 2015 to 50% in 2020 (according to the draft temporary regulation, in 2014, this level could have amounted to up to 80% of the amount of 2013). ).
- The majority of solutions of the Council concerning the greening
of the direct payments was maintained. Eventually, the greening is to be
- the three mandatory practices crop diversification, maintenance of permanent grasslands, maintenance of environmentally friendly areas (the EFA), or
- the equivalent practices, considered to bring the same or higher level of benefits for the environment and climate. They can include agricultural and environmental programmes (or agricultural-environmental-climatic programmes) or domestic and regional environmental certification systems. The list of practices treated as equivalent was to be determined in the Appendix to the regulation. Under the equivalent practices, there cannot be the double financing (i.e. a simultaneous payment for the same practices under the agricultural-environmental payment and the payment for "the greening").
- In the case of the mandatory practices of greening:
- the farms of up to 15 ha of arable areas (initially, the Commission proposed that this obligation should not concern arable lands) will be excluded from the requirement of maintaining the environmentally friendly areas; the list of categories of the lands treated as environmentally-friendly has been broadened, e.g. by nitrogen-fixing crops (the Fabaceae), intercrops and cover green as well as: the fallow lands, terraces, elements of the landscape, including the elements located within the area adjacent to the arable land, buffer zones, agricultural and forest systems, areas planted with short rotation coppices, where no mineral fertilizers and/or plant pesticides are used, parts of the plot adjacent to the edge of the forest, forested areas, from among which the member state shall select those valid within its area. In order to determine the percentage of the EFA area, the member states will be able to use appropriate weighting coefficients, taking account of the importance of particular areas for the environment.
- the area of arable lands of the farms, below which they shall be excluded from the requirement of the crop diversification was increased from 3 ha up to 10 ha. For the farms of 10 to 30 ha, two different crops (rather than three, as it was proposed by the EC) shall be required, and the main crop should not cover more than 75% of the arable lands' area; on the other hand, the farms with more than 30 ha of arable lands – shall have at least three crops on the arable lands, and the two main cultivations should not cover more than 95% of the arable lands;
- the implementation of the obligation concerning the
maintenance of permanent grasslands will be done in two stages, i.e.
- at the national level – in the event when the area of permanent grasslands in the country falls below the required threshold of 5%, the farmer shall be obliged to retransform arable lands into permanent grasslands, similarly as under the presently operating system concerning the maintenance of permanent grasslands;
- at the level of the farm – only the farms located in the Natura 2000 sites, where the naturally valuable permanent grasslands that require particular protection are determined, including peat and waterlogged soils. On these designated areas, the farmers shall not be allowed to transform or plough the permanent grasslands.
- The system for small agricultural farms is supposed to replace other components of the direct payments. It is a voluntary instrument for the member states and farmers . The amount of aid can be defined as a lump sum (the average payment for a hectare multiplied by the maximum of 5 ha, or 25% of the average national payment for a beneficiary – thus the total amount of these payment cannot exceed 10% of the national envelope) or as the amount corresponding to the sum of all payments that a farmer would be authorized to in the standard system. The maximum amount of the support for a farm may constitute up to 1250 EUR. The farmers using this form of aid will be excluded from the control of the fulfillment of the principle of the cross-compliance, and they will be relieved from the need to apply practices with regard to greening.
- The payment for young farmers will be a compulsory action for a member state. Up to 2% of the national envelope can be allocated for this type of support. The rate of the payment for young farmers shall be increased by 25%. The member state shall determine a limit of the number of hectares on a farm for which the support will be used. This limit can be from 25 ha to 90 ha. The payments will be granted to farmers who were younger than 40 in the year of submitting the first application and who farm not longer than 5 years.
- The member countries have a possibility to use the redistributive payment, consisting in the allocation of up to 30% of the national envelope for an additional payment for the same number of the first hectares in each farm, however not more than for 30 ha or not more than for the average area of the farm in the country, if the average is higher than 30 ha, and the amount of this additional payment cannot be greater than 65% of the average national rate.
- As a result of the discussion about the limitation of the support for the largest farms, a reduction of payments concerning the farmers receiving the direct payments in the amount of above 150 000 EUR annually was introduced. The reduction is supposed to amount to at least 5%. A member state can decide not to observe the reduction in the case of introducing of the redistributive payment, and to use more than 5% of the national envelope for this purpose.
- In the countries which have diverse values of entitlements in farms ( the historic model of direct payments), as a principle, the value of entitlements should be levelled in the country (or region) at the latest by 2019 (the internal convergence ). However, the member countries will be able to decide also about the partial standardization of this value in such a way that the farmers, for which the initial value of entitlements is lower than 90% of the average national or regional value for 2019, in 2019 have this value increased by at least 1/3 of the difference between the initial value and the annual average in 2019. In addition, in 2019, each farmer shall receive an area payment corresponding to at least 60% of the average in the country (or region). At the same time, a member state can introduce the mechanism of limiting the losses of a single farm to a level not higher than 30%.
- Up to 10% of the national level (8% + 2% for leguminous plants) can be allocated for the support related to the production. Furthermore, in some situations (concerning e. g. the member states which applied SAPS, including Poland), there will be a possibility to allocate up to 15% of the envelope for payments (13% + 2% for leguminous plants). This form of payment can be applied to the following sectors: cereals, oilseeds, protein crops, leguminous plants, flax, hemp, rice, starch potatoes, milk and dairy products, seeds, mutton and goat meat, beef and veal, olive oil, silkworms, dried feed, hop, sugar beet, cane and chicory, fruit and vegetables and short rotation coppices.
- When it is necessary to apply the financial discipline (the mechanism of reduction in the direct payments at a threat of exceeding the budget limits for the CAP Pillar I set for the long-term budget), it shall cover only agricultural farms that receive more than 2000 EUR.
- A definition of an active farmer has been agreed. Initially, the Commission proposed references to the size of earned revenues. Eventually, it was determined that the entities which do not run a strictly agricultural activity on the basis of a short list, compulsory for the member states (with a possibility of its supplementation with additional elements), shall be excluded from payments. This list includes entities involved in (managing): the airports, railway services, water supply pipelines, real estates, permanent sports and leisure areas.
However, the said entities may be recognized as active, if the sum of the direct payments obtained by them constitutes at least 5% of the income from non-agricultural operations, if their agricultural operation is not of low importance or if the primary focus of the entity's operations is the agricultural operation.
The above-mentioned principles shall not apply to entities which receive payments not larger than the amount specified by a member state, which, in turn, cannot exceed 5000 EUR.
The "Health Check" was a review of the current CAP state, and it resulted in the recommendations concerning the reform of the policy.
In the first half of 2010, the Commission organized a wide-ranging public debate, whose summary was a conference conducted in May 2010. In the Commission Communication of 2010, the strategic goals of the common agricultural policy for the next financial perspective were determined . In order to achieve the goals, the future CAP should have a more environmentally-friendly and fairly formed pillar I and the pillar II should focus to a greater extent on the competition and innovations.
The Communication further states that the basic principles of the operation of the direct payment system are:
- The support of basic incomes by means of guaranteeing the basic decoupled direct payments, ensuring a single level of mandatory support for all farmers in a given member state (or a region) based on the transferrable entitlements which will be activated by their connection with having arable lands qualified for the payment and meeting the requirements regarding the cross-compliance. The upper threshold for the direct payments obtained by large, individual agricultural farms should be introduced, and the process of the distribution of payments among particular farmers should be improved.
- The improvement of environmental activity implemented under the CAP by introducing a mandatory "green" component to the direct payments, and by the support for activities for the environment used across the territory of the EU. It can have a form of simple, general environmental activities conducted on the annual basis (e.g. the grasslands, green cover, crop rotation and ecological set-aside).
- The promotion of sustainable agricultural development in the areas with specific natural limitations, by ensuring additional support of the incomes of farmers conducting activities in these areas. The support can be granted in the form of area payments, with an option of the national entitlements to payments, granted voluntarily. The present LFA support would be abolished under the second pillar.
- In order to consider specific problems present in specified regions where the specific forms of agriculture are considered important for economic and/or social reasons, the voluntary support combined with the production may be maintained, provided that the constraints (limitation of support to the agreed regions, the amount of yields or the number of inventory)are clearly defined.
- The support of small agricultural farms by providing a minimum level of direct payments may alleviate the effects of difficulties with finding a job in many rural areas.
- The simplification of the principles of the cross-compliance by providing farmers and administrative bodies with a simple and more comprehensive set of principles, without weakening the concept concerning the principle of cross-compliance.
- The abovementioned changes concerning the forms of direct payments should go in with the improvement of the definition and better focus on the support only for the "professionally active farmers".
All the above postulates were translated into legislative proposals of the commissions, which were considered and agreed until a compromise was achieved in 2013.
The CAP for the period 2014–2020
On 24–25 June 2013, in Luxembourg, the Irish presidency reached a political agreement between the EU Council, European Parliament (PE) and European Commission (EC) concerning four draft regulations which are to adjust the functioning of the CAP in the period 2014–2020. The formal receipt of the legal acts took place in the autumn of 2013 [9, 10, 11, 12].
The negotiations on the CAP were strongly dependent on the pace of works on the Multiannual Financial Frameworks 2014–2020. In the conclusions concerning the MFF adopted by the European Council in February 2013, not only the size of the funds of the future budget, but also many significant matters relating to the CAP, e.g. the distribution of funds between the member states, flexibility of the pillars, limiting the payments to the largest farms (the capping), introduction of the "green" payment, levels of the co-financing with the EAFRD in Pillar II and the VAT eligibility to the contribution from funds, were settled. Those issues have been recognized by the EU Council for Agriculture as not subject to changes under the negotiations of the PE concerning the reform of the CAP.
Final stipulations adopted in the field of direct payments were as follows:
- The draft regulation provided the continuation of the simplified direct payment system SAPS until 2020, along with the possibility of using new components of the payment system, the payments for small farms and young farmers.
- The member states got the possibility of relocation of funds among the pillars (on the basis of the arrangements of the Summit concerning the MFF), as agreed in the Health Check.
- The countries using the SAPS will have the possibility to continue the support from the national budget for the sectors currently supported under the supplementary payments until 2020, as agreed in the Health Check.
- The majority of the Council's simplifying solutions concerning the greening under the direct payments was maintained, as in the "Health Check".
- The provision concerning the obligation to maintain permanent grasslands at the level of the farm has been modified. It was limited to the naturally valuable areas of the Nature 2000, including peat and waterlogged soils; Furthermore, if in a given country or region the share of permanent grasslands in the total area of arable lands did not decrease by more than 5%, the possibility of controlling the maintenance of permanent grasslands at the national or regional level rather than, as it had been in the primary proposal of the Commission, at the level of the farm, was introduced;
- The system for small farms and young farmers is such as in the provisions of the "Health Check", referred to at the beginning of this article.
- The provisions concerning the support related to production, financial discipline and definition of an active farmer are also identical. The provision concerning the "capping" has been alleviated. Previously, a payment reduction by at least 5% was postulated. Currently, it is 5%.
It appears clear that the system of direct payments evolved significantly within the last few dozen years. It ceased to be a fund that compensated the reduction in agricultural prices, it used to be the funds constituting a supplement of agricultural incomes on the historic basis, and it became the fund that promotes environmentally friendly actions. Regardless of its nature, the existence of direct payments provides farmers with economic security and therefore the payments should be continued in respect of more and more new hazards for this sector.
In conclusion, it is worth reminding that in the period from 1 May 2004 to 31 December 2013, Poland received more than 34 billion EUR under the common agricultural policy. Nearly 44% of this amount constituted the funds for direct payments. These were the funds which, thanks to a multiplier mechanism, contributed to Poland’s economic success, in the last decade, exports including.
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Julian T. Krzyżanowski
Department of Agricultural and International Economics, Warsaw University of Life Sciences, Poland
ul. Nowoursynowska 166
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